The Feeling Behind Every Financial Decision

Transcript

Hello everyone, it's good to be back. I want to take a break from the typical educational content and mix it up a little. We're going to dive into psychology. And this series, if it becomes a series, and I think it will, we're going to call "Why We Do What We Do With Money." Because money looks like numbers on the surface, but most of our decisions around it come from memory, comparison, and expectation. Across different centuries and economies, people repeat most of the same behaviors with money. Money is behavior.

We live in a time where almost any financial concept can be learned quickly. You can look up how an index fund works, understand retirement accounts, have AI teach you about taxes, even run projections on your phone while sitting on the couch. With that much information available, it would seem reasonable to expect financial decisions to come easier once the numbers are clear. And yet people react very differently to the same situation. The same opportunity can feel reassuring to one person and unsettling to another, even when the facts are identical.

What would explain this? Money is processed by the mind before it's processed by the calculator. A financial decision carries a feeling alongside the numbers, and that feeling tends to lead the way. There's a historical example that shows this clearly. After the Great Depression, many Americans stayed away from the stock market entirely for the rest of their lives. Not for a few years, for decades. They kept their savings in cash, in bank deposits, under the mattress, all while businesses were growing and stocks were compounding through the 1950s and 60s. They knew about the market. By then, newspapers printed stock prices daily, there were financial advisors, and the information was out there. But what stayed with them was the experience. They watched banks literally fail. They had seen neighbors lose their jobs overnight, which brought on this fragile feeling about money. Their brain stored that event as danger. The Great Depression, there's a reason it's called great. It was very great, and if you were working around then, it messed with you.

Psychologists later put a name to this and called it loss aversion. The Great Depression was an extreme example, but the idea is that a loss sticks with you much more than a gain. Losing $100 feels about twice as bad as gaining $100 feels good. We don't like losing money because it's painful, and the mind holds onto the memory of that pain and quietly tries to make sure you never experience it again. We see this a lot in sports betting: losses hurt much more than winning feels good. We also saw it in 2008, the Great Financial Crisis. There are really only two greats, the Great Depression and the Great Financial Crisis. A very similar behavior showed up in 2008. Those who went through it still talk about it today, and quite a few people never invested back into the stock market. From the outside, holding cash through one of the strongest economic expansions in history looks very cautious and conservative. From inside their experience, it looked sensible. Many years apart, very similar behavior.

You even see smaller versions of this today. Someone who lived through a layoff early in life might keep a large cash reserve even after their career has restabilized. Someone who watched their parents struggle with debt wants their mortgage paid off as soon as possible, regardless of the rate. The brain is just doing what it's designed to do, keep you safe.

Another piece of this is simply the discomfort of not knowing. We hate uncertainty. When outcomes feel unclear, the mind wants closure. Acting, even when the action isn't optimal, can feel calming because it ends the waiting. Psychologists sometimes call this uncertainty avoidance. You're really trying to settle a feeling.

Once you start seeing money this way, a lot of behavior starts to make sense. People's spending decisions can be almost like a story, or memories they're carrying into present decisions. It's important to go through these feelings and understand why you might be feeling a certain way around a financial decision, and to keep an open mind knowing you might have some subconscious baggage driving your choices. Spreadsheets matter. Seeing projections matters. They can help drive confidence. But at the end of the day, that feeling tends to lead the way initially. Having this awareness might allow you to step back and not act right away on that first feeling, or even the second, but rather think through why you're feeling this way, talk to someone about it, and make the best decision for yourself. Because money is tied to security, and security sits pretty deep in the human mind.

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